Traditional vs. Roth

Which one to choose?  An extremely personal decision that boils down to tax advantages you want to gain.  Always confer with your CPA before making your decisions, but go into the meeting with full knowledge of the differences, benefits, and potential scenarios in which one (or possibly neither!) may be more advantageous.  TLDR: it is a spectrum that will change throughout your life.

First and Foremost...

  • Check the limits!  For 2022, most can contribute up to $6,000.  50 or older, $7,000.
  • Only earned income can be contributed, so be mindful if you've earned less than the limit.  Passive income (real estate, alimony, child support, etc.) doesn't count.
  • Remember that these accounts are set up to benefit a traditional retirement, which means you won't be able to access the entirety of the funds until age 59 ½ without penalty.  If you will need access to the money before then, you probably should be saving in a money market or investing in a brokerage account instead.  In that case, neither account type is right for you.

Tax Treatment for Accounts*

Traditional: Dollars are contributed pre-tax (both state and federal).  This reduces your taxable adjusted gross income (AGI) for the year, which means more money to spend now.  However, taxes are due on the money when it is withdrawn from the account.  Those taxes are paid at your full income tax rate.

Thank you, Senator Roth!
Roth: Dollars are contributed post-tax.  There are no up-front savings for your taxes.  Instead, the money grows tax-free and is withdrawn from the account tax-free, no matter how much is withdrawn.  The government got their cut up-front.

Fun fact: Roth accounts are named for Senator William Roth, who introduced the Roth IRA as part of the Taxpayer Relief Act of 1997.

*Note: The tax treatment applies to any 401k, IRA, or other tax advantaged account of these types.  Always start with your 401k if you get an employer match.

My Own Tax-Advantaged Adventures

Before and during college, I went 100% Roth since I earned $15k (or less) per year.  I still paid some taxes as a dependent.  During my first few years working, my income was low and I knew it would only go up, so I stuck with the Roth IRA and a Roth 401k.  When I rented out the majority of my house on AirBNB, my tax treatment was so favorable and my effective tax rate was so low that I stayed 100% Roth until after I married.  At that point, with deductions reduced dramatically and my effective tax rate going up significantly, I switched to a traditional 401k and Roth IRA.  This helps with tax diversification and strategies for withdrawal.

Traditional vs. Roth

The Time for Traditional

Full transparency: Some people will tell you to always go 100% traditional because you can pay 0% in taxes upon retirement.  This is absolutely true only if you withdraw exactly up to the standard deduction every single year, and no more.

I don't want to live on what equates to $12,950 per person in today's dollars every single year.  I will be paying the marginal tax rate later.  If you do the actual math, taking a 10% cut now or a 10% cut upon withdrawal ends at the same amount of money, all other things being equal.

Everyone's scenarios need personal attention.  One size does NOT fit all.

Higher Marginal Tax Rate

When you make more, you pay more in taxes.  It's a good problem to have.  Saving in a traditional account lowers your taxable income (your AGI), which lowers your tax burden.

The US has a progressive tax system.  We apply marginal tax rates, where the last dollar earned is taxed higher (at the highest tax bracket) than the first dollar earned (which is taxed using the lowest tax bracket).  When you bump into the next tax bracket, it's the next dollar that's taxed at that new rate, but the dollars that came before it were still taxed at the lower rate.

Example: Single filers bump into the 22% marginal tax rate for 2022 at only $41,775 AGI.  With the standard deduction of $25,900, that essentially means you can earn up to $68k as a single filer before you are bumped up into the higher marginal tax rate.  On anything over the $68k, you are essentially paying a 22% tax on any money put into a Roth.  At that point, it is harder to justify a Roth account, because that 22% cut up front could likely be avoided later using smart tax strategies, especially if you don't anticipate needing to withdraw that much money per year later in retirement.

It boils down to this: pay your marginal tax rate now, or use smart tax strategies later to pay half or less upon withdrawal?  (This doesn't account for possible tax rate hikes later, another reason account diversification makes sense.)

Other Tax Incentives on the Line

Because the Traditional contributions lower your AGI, it may help you qualify for other tax incentives like the child tax credit, the student loan interest deduction, the Lifetime Learning Credit, etc.  It's almost always beneficial to reduce your taxable income to qualify for these incentives over contributing to a Roth.

For example, in 2022, you no longer qualify for the student loan interest deduction when your modified adjusted gross income reaches $85k as a single filer.  If you earn $86k MAGI, putting $16k in a traditional 401k would reduce your income to the needed $70k MAGI to qualify for the full tax incentive - a $2,500 deduction, which would get you $550 back at the 22% bracket.  With $16k put into your traditional 401k, you'd also save $3,520 in federal taxes up front, although you'd of course pay taxes when you withdrew.  That's over $4,000 saved now.

Moving Later?

Do you live in a state with state income tax (like Michigan)?  If so, are you planning to move somewhere that doesn't have state income tax (like Florida)?  If your answer to both was yes, it can be beneficial to save the dollars on the state income taxes.

Make sure you run the numbers and evaluate your own scenario.  I personally chose to pay the 4% Michigan state tax (from age 17 to age 24) to put money in a Roth because the money has my entire life to grow and the withdrawals will be entirely tax-free.

Too High Income for Roth

A Roth 401(k) doesn't have any income limits. Not the same for an IRA, though.

Single? Hitting $144k+ MAGI means you are out of luck for a Roth IRA. Married filing jointly? Hitting $214k+ MAGI means you are out of luck for a Roth IRA. In either case, the traditional IRA is your only option. If your income is so high it makes your traditional IRA contribution nondeductible, look into a Roth conversion. You can deposit into a non-deductible IRA and then convert the funds immediately to a Roth account to have tax-free withdrawals on earnings later.

The Time for Roth

If you go 100% Roth your whole life, you are giving up future tax advantaged space (specifically your annual standard deduction) if/when you stop earning an income.  However, there are definitely certain seasons of life to go 100% Roth.

No Deductions

If you are not able to get a tax deduction for a traditional contribution, go for the Roth, the back-door Roth conversion, or even consider a standard brokerage account.

Lower Income

If you essentially pay 0% on taxes thanks to your deductions, you should almost always go with a Roth.  There is no reason not to!  All future withdrawals are entirely tax free.

Just Starting Career

If you are in the 10 or 12% marginal tax rate and you are certain your income is likely to go up-up-up, get the tax account diversification in now.  Roth accounts allow for lump sum withdrawals after 59 ½ of any amount, with no impact to your taxes.

Diversification usually helps more than hurts.  Even if you're in a higher tax bracket, you may want to tuck a portion in a Roth.  It will have a substantial portion of your life to grow.

Potential Need

You can withdraw your contributions penalty-free at any time and for any reason.  For example, if you contribute $2,000 and it grows to $2,500, you can take out $2,000 without a penalty. However, you’ll be penalized if you withdraw the earnings before turning 59 ½, unless it’s for a qualifying reason.  Qualifying reasons include paying for college for you, your spouse, your children, or your grandchildren, a first-time home purchase, or certain emergencies.  Consult your CPA for any questions about your specific situation.


Roth IRAs allow you to contribute at any age as long as it's your own earned income, but traditional IRAs do not allow contributions past 70 ½.  Instead, they force withdrawals and penalize you if you fail to take them.

If your goal is leaving it to your heirs...

Roth IRAs never require withdrawals, so you can leave it to grow tax free for... well, your forever.  With a traditional IRA, you must start making RMDs (withdrawals, or “required minimum distributions”) at age 70 ½.

The Time It Depends

Personal Money Behavior

If you will put exactly $6,000 into your account (be it traditional or Roth) and aren't saving and investing the tax difference but instead frittering it away, you might as well put the money in a Roth.  It takes more discipline to invest the difference, and most people don't do it.

After-tax (Roth) dollars are more valuable than before-tax (traditional) dollars, so you're actually saving more in a Roth IRA than in a traditional IRA when the final dollar amount deposited into the account is equal.

$6,000 in a Roth IRA = $6,000 in a traditional IRA + the tax savings of $1,320 (at a 22% marginal tax rate) which would have to be invested in a brokerage account to cover the taxes when the dollars are withdrawn. :)

You May Need Money Sooner

If you need it sooner than traditional retirement age, a money market account or brokerage account is probably the way to go.  If your timeline is short, consider leaving it as cash.

Every situation is different.  Nothing about personal finance is one-size-fits-all.